Bulls remain on the sidelines amid bets on a Fed rate cut

• USD/CAD struggles to attract buyers amid broad Fed-inspired USD weakness.
• Low oil prices are undermining the Loonie and providing some support to the major.
• Traders also appear cautious ahead of next week’s highly anticipated FOMC meeting.

The USD/CAD pair pulls some buying discount on Friday, although it is unsuccessful and remains below the 1.3600 level until the start of the European session. Crude oil prices are stalling this week’s strong recovery from May 2023 lows, led by concerns over production disruptions caused by Hurricane Francine in the US Gulf of Mexico, amid a gloomy demand outlook. In fact, OPEC on Tuesday cut its forecast for global oil demand growth in 2024 and cut its expectations for next year, marking the producer group’s second consecutive downward revision. Moreover, the International Energy Agency (IEA) said on Thursday that global oil demand will grow less than previously expected this year due to weak demand from China. This in turn limits the upside of the black liquid, which is seen undermining the commodity-linked Loonie and acting as a tailwind for the currency pair.

However, upside for the USD/CAD pair appears limited following weakness in the US dollar (USD), triggered by growing bets for more aggressive policy easing by the Federal Reserve (Fed). Markets are now pricing in a 45% chance the US central bank will cut borrowing costs by 50 basis points (bps) at the end of a two-day policy meeting on September 18. The stakes were raised after the US release. The producer price index (PPI) on Thursday provided further evidence that inflation is easing. The US Bureau of Labor Statistics reported that the annual PPI rose 1.7% versus estimates of 1.8%, and the previous month’s reading was revised down to 2.1% from 2.2 %. Moreover, the core PPI, which excludes volatile food and energy prices, was steady at a 2.4% annual rate and missed expectations for a 2.5% reading, fueling speculation of a super cut -sized rate next week.

Meanwhile, dovish Fed expectations drag the yield on the benchmark US 10-year bond to its lowest level since May 2023. This, along with a positive risk-on tone, helps push the dollar lower on the day to a low of more than a week and could contribute. to maintain a lid on the USD/CAD pair. Traders may also prefer to sit on the sidelines and wait for next week’s key central bank event risk – Wednesday’s highly anticipated FOMC monetary policy decision – before placing new directional bets. Meanwhile, Friday’s release of Michigan’s preliminary US consumer sentiment index will be scrutinized for near-term trading opportunities. Meanwhile, the mixed fundamental context suggests that sustained strength above the 1.3600 mark is needed to support the prospects of extending the recent good recovery move from the 1.3440 area or a multi-month low reached in August.

Technical perspectives

Technically, the USD/CAD pair is holding above the 23.6% Fibonacci retracement level from the August drop and could appreciate further. That said, the oscillators on the daily chart have yet to confirm a positive bias, suggesting that any further move up could continue to face resistance near the 38.2% Fibo. level, around the 1.3625-1.3635 region. Sustained strength beyond the said barrier, however, could prompt some technical buying and allow spot prices to recover the 1.3700 level, which coincides with the 50% Fibo. level.

On the other hand, weakness below the 1.3565 area is likely to attract some buyers and remain limited near the USD/CAD pair. A convincing break below the latter will suggest that the recent rally seen over the past two weeks has run its course and see the vulnerable USD/CAD pair accelerate its slide back towards the 1.3440 region, or its lowest level since March past. month. The downward trajectory could extend further towards the 1.3400 round figure on the way to the late January low around the 1.3360-1.3355 region.

USD/CAD Daily Chart